I've written about Brazil pre-Lula and post-Lula and spent the last five years covering all aspects of the country for Dow Jones, Wall Street Journal and Barron's. Meanwhile, for an undetermined amount of time, and with a little help from my friends, I will be parachuting primarily into Brazil, Russia, India and China. But will also be on the look out for interesting business stories and investing ideas throughout the emerging markets.

The Post-Western World

The economic crisis in advanced economies is accelerating the timeline in which big emerging nations like China rule the global economy. Instead of the market focusing on American shopping habits, they’ll be focused on consumers in Shanghai and Mumbai. Unless the US can recover the 8.5 million jobs it lost in the recession, and unless incomes begin rising, the US will be knocked off its pedestal within a generation. The post-Western world is coming faster than we think.

For the first time in its history, the US lost its coveted AAA credit rating status on Aug. 5. After market hours, credit rating agency Standard & Poor’s cut the US rating to AA+, one notch below the AAA rating US Treasury debt has been ranked since 1917. Had they made the announcement when the market was open, the downgrade might have been a circuit-breaker day for Wall Street — when the NYSE automatically stops trading when the index loses 10%. That same day, the European debt crisis was looking worse yet again with Italy’s trillion euro debt in the spotlight, and what it could mean for European private banks. The European Central Bank (ECB) had to jump in to calm markets, saying the ECB would backstop Italy in case of a default. Now Italy is forced to cut benefits to workers there, a budget decision that has caused riots in Greece this year. The comforts that came with living in a rich country are fast becoming something only for the rich to enjoy from Rome to New York. In the US, the middle class is shrinking with age. In many European countries, entitlement programs are being trimmed, thus cutting into the life styles of older Europeans who will see their spending power eroded. With the US as Dorothy and the EU as Toto, neither are in Kansas anymore.

The loss of AAA status is not to be taken lightly. Although the Federal Reserve Board directed banks to continue holding US Treasurys and keep interest rates stable, the downgrade is meaningful. Most money market funds, pension and mutual funds investing in bonds have rules, or covenants, that require them to hold only AAA debt. Most funds will likely be forced to change those covenants in response to this extraordinary situation, but not all will do so. There are trillions of dollars in US government debt held by fund managers around the world, a small 10% sell-off would dump over a hundred billion dollars worth of bonds into the market, causing bond prices to fall. And when bond prices fall, yields rise. New bond issues, including state and municipal bonds, may very well have to increase coupon rates in order to attract bond investors who now see a greater risk of default and therefore want to be paid for that risk in lending to new issues. It would be unprecedented if a bond rated AAA was paying 3% and gets downgraded to AA and still pays 3%. The lower the credit rating, the higher the interest. Will the US be the exception, and if so, for how long? Nobody knows. But everyone has a pretty good guess.

Earlier this week, President Barack Obama said that a credit downgrade would cause adjustable rate mortgages to rise, and credit cards and auto loan borrowing costs to rise, too.

As rich economies’ prospects dim under their crushing debt burdens and political paralyses, the world’s hope for economic dynamism rests with developing nations, writes Dani Rodrik, Harvard professor of international economic policy. “These countries had an exceptionally good decade before the global financial crisis hit and most among them have recovered quickly.”

The growth trend is clear: the advanced economies are declining.

Their biggest problems at the moment are inflation, much of it caused by the easy money policies of the US and EU, and multinational corporations investing heavily in the big emerging markets like Brazil and China, thus flooding the countries with dollars. For their stock markets, the biggest problem is the systematic risk coming from Washington and Europe.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Comments

The US (and Europe and Japan) are often described as having a post-industrial economy. This is not really true, it is more like a para-industrial economy. There is today more industrial activity in the world than at any time in history. In the last 200 or so years, the financial end of industry was generally in the same country as the manufacturing end of industry as was much of the customer base.

Take automobiles for example. Companies like Ford had been operating overseas since the 1930′s. Ford was building trucks in Germany in the 1930′s (there were more than a few US GI’s who were surprised to see the German army driving Opals). GM and Ford had been active in Japan until 1936 until Japanese nationalist legislation made that impossible. In fact GM was the dominant automobile manufacturer in Asia from the 1920′s to outbreak of WWII. GM and Ford had factories in Japan, China, Australia, South America, and India in the 1920′s. GM opened its first African operation in 1913 and its first factories there in the 1920′s.

What was true for GM and Ford were true for many US companies, they have had operations all over the world for most of the 20th century. General Electric, Edison, Standard Oil,

In the past, it was much more profitable make say a Ford Prefect in the Dagenham, Essex and sell it in the UK than make the same model in the US and ship them there. This was true for a great many items so, when possible, manufacturers would build operations as close to the final market as possible.

What changed was that prior to the 1960′s and ’70′s shipping technology and costs began to dramatically drop. Gradually, it became more profitable to manufacture automobiles of TVs in places like Mexico or Brazil and ship them to the final market, say the US. This trend has accelerated by several factors, including opening of trade barriers (India for example had nationalized Ford and GM operations in the 1950′s did not allow them to return until the 1980′s), the opening of China, Vietnam, and other communist countries of east Asia, & so forth. With Bunker C (No. 6) fuel cheap and gigantic containerized shipping available, a manufacturer could make any commodity with high tradability in any location in the world and sell it profitably anywhere else in the world.

This of course resulted in the disappearance of manufacturing from the US economy over the last 40 years. However, it has not divorced the US economy from industry. The US remains the largest market for the products of industry. The US remains one of the major centers for basic and applied research which drive manufacturing. More importantly, the US remains the major source of capital for industry. So the US remains a major industrial power, without the actual manufacturing.

This is why I think “Para-Industrial” is a better description than “Post-Industrial”. The US economy exists as critical appendage to the world industrial economy, parallel to manufacturing without actually participating.

The decrease in manufacturing but the increase in research, funding, and consuming has produced a process of “Financialization” where the vast majority of profits are generated not by the shrinking manufacturing sector but, which has largely moved “off-shore”, but by finance, insurance, and real estate (FIRE). FIRE constitutes 40% of all profits generate in the US while a generation ago is was more like 4%.

The busy ant colony is a common image of human industry, great numbers of individuals working hard for the greater whole at a common location in a coordinated fashion. Each contributes to the colony and each is rewarded.

However there are parasitic ants. In some cases, (Tetramorium caespitum) they attack other colonies and steel the worker ants and bring them back to the home colony. The parasites can feed themselves but use the slave ants to help them. In more advanced cases (e.g. Strumigenys perplexa), the parasites invade the colony other species and take it over and are entirely dependent upon the captured colony (Strumigenys xenos). In the most advanced cases, only the parasitic queen invades that host colony. In some cases the host queen is killed and replaced by the parasite queen but in others, the parasite queen merely lives with the host queen.

As parasitism advances, the parasite loses more and more functions, has fewer and fewer members, and becomes more and more dependent upon the host. This is what has happened the US and European economies, they are parasites upon the emerging economies. They provide the technology and capital and consume much of the final products, but do not actually produce too many commodities themselves.

Another reason these economies are rightly called “Para-Industrial” economies, as in parasitic industrial economies.

Oh, David, I wanted to say to you that Vladimir Putin said this in so many words last week. He outright called the US economy a parasite. I posted a pick up to that Ria Novosti article here at Forbes. Thanks for reading, as always.

In 1902 an English economist by the name of John A. Hobson wrote a book titled, simply, “Imperialism” (remembering here that in those days “imperialism” was not a bad word but rather something good and positive – the “White Man’s Burden” and all of that). In it described the detrimental effect of imperialism on the home economy of the UK. He wrote “’In 1893 the British capital invested abroad represented about 15 per cent of the total wealth of the United Kingdom…Aggressive imperialism, which costs the tax-payer so dear, which is of so little value to the manufacturer and trader … is a source of great gain to the investor…. The annual income Great Britain derives from commissions in her whole foreign and colonial trade, import and export, is estimated by Sir R.Giffen at £18,000,000 for 1899, taken at 2 1/2 per cent, upon a turnover of £800,000,000.’” Hobson goes on to note:”’The greater part of Western Europe might then assume the appearance and character already exhibited by tracts of country in the South of England, in the Riviera and in the tourist-ridden or residential parts of Italy and Switzerland, little clusters of wealthy aristocrats drawing dividends and pensions from the Far East, with a somewhat larger group of professional retainers and tradesmen and a larger body of personal servants and workers in the transport trade and in the final stages of production of the more perishable goods; all the main arterial industries would have disappeared, the staple foods and manufactures flowing in as tribute from Asia and Africa. . . . We have foreshadowed the possibility of even a larger alliance of Western states, a European federation of great powers which, so far from forwarding the cause of world civilization, might introduce the gigantic peril of a Western parasitism, a group of advanced industrial nations, whose upper classes drew vast tribute from Asia and Africa, with which they supported great tame masses of retainers, no longer engaged in the staple industries of agriculture and manufacture, but kept in the performance of personal or minor industrial services under the control of a new financial aristocracy. Let those who would scout such a theory (it would be better to say: prospect) as undeserving of consideration examine the economic and social condition of districts in Southern England today which are already reduced to this condition, and reflect upon the vast extension of such a system which might be rendered feasible by the subjection of China to the economic control of similar groups of financiers, investors, and political and business officials, draining the greatest potential reservoir of profit the world has ever known, in order to consume it in Europe. The situation is far too complex, the play of world forces far too incalculable, to render this or any other single interpretation of the future very probable; but the influ! ences wh ich govern the imperialism of Western Europe today are moving in this direction, and, unless counteracted or diverted, make towards some such consummation.” Is this not exactly what what has been happening in the United States for the 40 years? Do we not have “…little clusters of wealthy aristocrats drawing dividends and pensions from the Far East…”? Are the greater part of the American working classes “ no longer engaged in the staple industries of agriculture and manufacture, but kept in the performance of personal or minor industrial services under the control of a new financial aristocracy”? Has not ”all the main arterial industries…disappeared” from the United States? What we are seeing now is the inevitable conclusion of the export of the US manucturing industry.

Mortgage Rates have hit an all time low! For many, these rates will be the lowest we see in our lifetime. Rates change several times throughout the day, so to get an accurate quote search online for “123 Refinance” learn about mortgage refi before you do refi on your home.